FAQs on LLP formation in India

Introduction

Starting a business in India can feel like a maze, especially with all the different legal structures. But don’t worry, a Limited Liability Partnership (LLP) offers a balanced and attractive option for many entrepreneurs. It combines the best features of a traditional partnership and a company, giving you both flexibility and protection. This guide will help you understand if forming an LLP is the right move for your venture.

Q1:What Exactly is an LLP?

An LLP, short for Limited Liability Partnership, is a unique business structure recognized under the Limited Liability Partnership Act, 2008. Think of it as a separate legal person, just like a company. This means the LLP can own assets, enter into contracts, and even be sued in its own name.
The most appealing part of an LLP is its limited liability feature. This means that as a partner, your personal assets are generally protected from the business’s debts or losses. Your financial risk is limited to the amount you’ve agreed to put into the LLP. Unlike traditional partnerships, where partners can be held personally responsible for the actions of other partners, in an LLP, one partner is usually not liable for the mistakes or negligence of another. This structure also ensures the LLP continues to exist even if partners join or leave, offering perpetual succession.

Q2:Why Choose an LLP? What are the Benefits of LLP?

Many businesses, especially professionals and small to medium-sized enterprises, find LLPs very appealing. Here are some key benefits:

• Limited Personal Risk: Your personal assets are safe from the business’s debts, a significant relief compared to traditional partnerships.
• Easy to Manage: LLPs generally have fewer complex rules and formalities compared to Private Limited Companies, making them simpler to set up and run.
• Lower Setup Cost: The initial cost to register an LLP is often less than incorporating a Private Limited Company.
• No Minimum Capital: You can start an LLP with any amount of capital contribution, even a very small one.
• Separate Legal Identity: The LLP exists independently of its partners, which adds to its credibility and allows it to own property and enter into contracts.
• Flexible Operations: The LLP Agreement allows partners to define their roles, responsibilities, and how decisions are made, offering great freedom in management.
• No Compulsory Audit (for smaller LLPs): Many LLPs do not need to get their accounts audited, saving on compliance costs, unless their annual turnover exceeds ₹40 lakh or partner contribution goes above ₹25 lakh.
• Perpetual Existence: The LLP continues to function even if partners change, ensuring business continuity.

Q3:What personal documents are required from partners for LLP registration?

You will need the PAN Card of all proposed partners, Address Proof (Aadhar Card, Passport, Voter ID, or Driving License), Bank Statement or Latest Utility Bill (not older than 2 months) for address proof, and passport-sized photographs of all partners.

Q4:What documents are needed for the LLP’s registered office address?

For the registered office, you need the Latest Utility Bill (e.g., electricity, gas, property tax receipt) not older than two months, a No-Objection Certificate (NOC) from the landlord (if rented), and the Rental Agreement or Sale Deed, if applicable.

Q5:What are the mandatory annual compliance filings for an LLP?

LLPs must file:

• Statement of Account & Solvency (Form 8): Annually, by October 30th (within 30 days from the end of six months of the financial year).
• Annual Return (Form 11): Annually, by May 30th (within 60 days from the end of the financial year).
• Income Tax Return (ITR): Annually (ITR-5), by July 31st for non-audit cases, and October 31st for audit cases.
• Form DIR-3 KYC: By September 30th every year for designated partners.

Q6:Who can be a partner in an LLP?

Any individual or a company (body corporate) can be a partner in an LLP. However, individuals declared to be of unsound mind, undischarged insolvents, or those with pending insolvency applications cannot be partners.

Q7:What is the difference between a ‘Partner’ and a ‘Designated Partner’ in an LLP?

A Partner is similar to a shareholder, with financial risk limited to their contribution. A Designated Partner is an individual responsible for day-to-day operations and ensuring the LLP complies with legal requirements under the LLP Act, 2008. They are personally responsible for compliance-related matters.

Q8:What is the general procedure for converting an existing partnership firm to an LLP?

The procedure involves:

• Obtaining DSCs for partners and getting the proposed LLP name approved.
• Filing Form 17 along with Form FiLLiP to the ROC.
• The ROC issuing a Certificate of Registration for the new LLP.
• Filing the LLP Agreement (Form 3) within 30 days of incorporation.
• Intimating the Registrar of Firms about the conversion.

Q9:What are the main differences between LLP vs Private Limited Company?

Choosing between an LLP and a Private Limited Company depends on the nature and scale of your business. Both structures offer limited liability, but they differ significantly in terms of compliance, governance, and funding options. An LLP, governed by the LLP Act, 2008, is ideal for small or professional businesses seeking operational flexibility and lower compliance, with no limit on partners and audit requirements only above certain financial thresholds. In contrast, a Private Limited Company, regulated under the Companies Act, 2013, has stricter compliance norms, a fixed management structure, mandatory audits, and better capital-raising options through shares, making it more suitable for startups and growth-oriented businesses, especially those seeking foreign investment.

Q10:When to choose an LLP?

An LLP is an ideal choice for entrepreneurs looking for a mixture of partnership flexibility and corporate limited liability. It’s particularly well-suited for professional firms like lawyers, accountants, or consultants, and small to medium-sized businesses that do not expect significant external equity funding from venture capitalists or angel investors. This structure offers easier compliance compared to private limited companies, no minimum capital requirement, and a perpetual existence. It allows partners to protect their personal assets from business liabilities while maintaining direct control over operations.

Q11:When to choose a Private Limited Company?

A Private Limited Company is an excellent choice for businesses aiming for significant growth, scalability, and external investment. It’s ideal for startups seeking funding from venture capitalists or angel investors, as it allows for easy equity dilution and share transfers. This structure provides limited liability protection to its shareholders, meaning personal assets are safeguarded from business debts.It also offers perpetual succession, ensuring the company continues regardless of changes in ownership.While involving more compliance compared to an LLP, its formal structure provides enhanced credibility and better access to institutional finance, making it suitable for ambitious ventures.

Q12:How can an LLP be closed in India?

An LLP can be closed by applying to the Registrar of Companies (ROC) to remove its name, typically if it has not carried on business for one year or more. The procedure involves ceasing commercial activity, closing bank accounts, clearing liabilities, preparing documents (including CA certificate), filing all overdue returns, and then filing e-Form 24.

Important Considerations

• Virtual Office Address: While running a business online is common, the ROC generally requires a physical address for an LLP’s registered office. A virtual office address can be used as the registered office of an LLP in India, provided it meets statutory requirements like having a legitimate physical address, allowing receipt of official documents, and offering proof of address through valid documentation (e.g., NOC, utility bills, lease agreement with the virtual office provider). However, it’s always best to verify with official guidelines or consult with a legal professional to ensure full compliance.
• IEC License for EXIM Business: If your LLP plans to engage in import or export activities, you must obtain an Import Export Code (IEC) license. This is a 10-digit identification number issued by the Directorate General of Foreign Trade (DGFT), Ministry of Commerce and Industry. The Approx government fee for a new IEC is ₹500. You can apply for it on the DGFT website.
• Chartered Accountants and LLPs: Yes, a Chartered Accountant (CA) can practice through an LLP. The Institute of Chartered Accountants of India (ICAI) has issued guidelines, such as the ICAI (Aggregation of LLPs) Guidelines 2024, for CAs forming or joining LLPs, ensuring compliance with the Chartered Accountants Act, 1949, and the LLP Act, 2008.

Conclusion

Forming an LLP in India offers a compelling mix of protection and flexibility for many business types. It’s an excellent choice if you’re looking for limited personal risk, simpler compliance compared to a company, and a flexible management structure. While the process involves several steps and fees, understanding each stage ensures a smooth and compliant setup. Remember to keep up with annual filings to avoid penalties and ensure the long-term success of your LLP.

Suggested Read :

LLP agreement vs Partnership Deed

Importance of an LLP Certificate

Advantages of LLP Company

Change LLP Office Address

LLP Strike off vs Winding up

FAQs